MEREDA predicts tight industrial, hotel sales, stronger overall real estate market in 2015

The Maine Real Estate & Development Association’s annual conference Thursday showed a positive turn in 2014 and 2015 in many Maine real estate markets, with particularly tight inventory in the industrial and hotel/hospitality sectors as well as multi-family housing, especially in Portland.

The event drew over 700 attendees and some 50 exhibitors to the Holiday Inn Portland-By The Bay.

Industrial

“The space crunch is happening,” Justin Lamontagne, a broker at NAI The Dunham Group, told attendees to his session on the Southern Maine Industrial Forecast. “There are few options, even in Biddeford.”

Notably, the investment market is on fire in the industrial and other real estate sectors. “These will be some of the largest deals of the year by far,” he added.

Currently, there are 556 buildings with about 17.8 million square feet in total available in the seven cities and towns he surveyed: Biddeford, South Portland, Westbrook, Portland, Gorham, Scarborough and Saco. But of that, only 734,934 square feet is available, which translates into a 4.12% vacancy rate in 2014, tighter than the 5.27% in 2013.

In Portland, average lease rates have ticked up slightly.

“From 2014 to 2015, landlords regained leverage. Interest in land increased and lease rates continued to climb,” he said. That will continue through 2015, he said.

Bangor

The Bangor Mall continues to anchor commercial activity in that area, according to Bev Uhlenhake, a commercial real estate broker at Epstein Commercial Real Estate in Bangor. The mall has grown by 500,000 square feet since 2009. The rest of the commercial real estate in the area is flat to down.

One bright area is entertainment, including events and big-name music acts at the Cross Insurance Center and Darling’s Waterfront Pavilion on the Bangor waterfront. The American Folk Festival and Hollywood Racino also have been big contributors to the area.

However, job losses at mills in the area, such as the 200 people let go from Lincoln Paper and Tissue in December 2013, have hurt the area, with more than 1,500 jobs directly impacted within 60 miles of Bangor.

Turning around that job loss has been difficult, even though some workers have been rehired. Uhlenhake said 75% of those who lost jobs are male, 63% are over 50 years old, 67% only have a high school diploma, yet their average annual income was an $80,000 package per employee. That compares to a $50,000 throughout the state.

“So that’s hard to replace,” she said, referring to the impact on the 136 communities where the workers lived.

Looking forward to 2015 and 2016, she said the mill closures fallout remains to be determined, but people are struggling. “There are homes for sale for $2,500,” she said.

Central Maine

When it comes to the Lewiston/Auburn area, it shouldn’t try to compete with a business hub like Portland, Kevin Fletcher, broker Kevin Fletcher of Malone Commercial Brokers told the audience. The population growth in the state is small and doesn’t support that activity.

However, he noted that the L/A area has a population of 100,000, and more than half a million people live within a 30-mile radius.

He pointed to developments at Riverfront Island and Bates Mill as highlights of commercial activity in the area.

Maine economic forecast

This year, the United States will outpace global growth for the first time in many years, Michael Dolega, senior economist at TD Bank, said in giving the Maine state economic forecast.

He added that long-term rates will stay low for some time because of the weak global economy, and the dollar will be a big winner. This is a very favorable environment stateside, he added.

Employment growth in Maine is at half the pace of the United States as a whole, but with more than 7,000 new jobs, the state is seeing its strongest job growth since 2000. Portland employment grew the most at 1.6%, while Lewiston’s slowed to 0.2% recently.

The jobless rate in Maine rose slightly recently, but it should continue to improve, Dolega said. The tightest labor market is in Portland at 4.7%, while Lewiston (5.4%) and Bangor (5.6%) were softer.

The Bank of Canada on Wednesday abruptly cut its key overnight lending rate by 0.25% to 0.75%, and that could pinch Maine businesses, as half of the state’s imports go to Canada. “So that makes it a bit more difficult for firms exporting just north of the border,” he said.

Finally, he said manufacturing payrolls are rising robustly nationally and in Maine, where wood products and shipbuilding remain strong.

MEREDA Index

The MEREDA Index for the third quarter of 2014 showed that the hospitality and residential sections pushed more briskly into downtown Portland, said Tim Soley, owner of East Brown Cow, in a videotaped presentation. He added that the high cost of new office construction will continue to dampen new supply, strengthening the occupancy and increasing the pricing of office space.

In a similar video broadcast, Jonathan Culley, owner of Redfern Properties LLC, said demand for in-town housing in Portland continues to be strong both for renters and buyers. The rental market, he said, appears most robust, with unprecedented demand for newer, high-quality apartments.

Residential construction in 2014 started late, but late in the fall, there was an unprecedented interest in customers wanting to talk about projects that would begin this spring, Mark Patterson, co-owner of PATCO Construction, said via video.

And Chris Paszyc, partner in CBRE|The Boulos Co., said most commercial properties continue to be in high demand statewide, especially those that are investment-grade.

Vacation/Hospitality

Maine’s hospitality sector is expected to continue to shine in 2015, with increases in average daily rates and revenue per available room expected, according to Daren Hebold, president of LUX Realty Group. The state’s occupancy rates are expected to remain flat at around 58%, like they have in the past five years, but daily rates are expected to increase to $119 and revenue per available room to $69.70.

Hebold said 2015 will cap off a development surge, which contributed an increase in 1,174 rooms last year between 14 projects across the state. An extra 879 new rooms are expected this year between nine hotel projects under construction or in development. After this next wave of new hotels, which includes the 124-room Residence Inn by Marriott in Bangor and 120-room Homewood Suites in Augusta, Hebold said development activity is expected to taper off and rate growth is expected to stabilize and plateau.

Southern Maine residential

Multi-family sales continued to increase in the Portland and Saco/Biddeford markets by 17% and 26%, respectively, while South Portland, Westbrook and Lewiston/Auburn all saw single-digit decreases, according to Brit Vitalius, principal at Vitalius Real Estate Group in Portland and president of the Southern Maine Landlord Association.

Sales volume for multi-family units increased 26% in Portland, 27% in South Portland, 5% in Saco/Biddeford, while decreasing by 3% in Westbrook and by 11% in L/A. The median sales price increased 19% in South Portland, 18% in Westbrook and 5% in Portland, while remaining flat in Saco/Biddeford and L/A.

Vitalius said local and out-of-state investors helped drive Portland’s multi-family market in 2014, noting the higher end market is expanding on the city’s peninsula.That is spurring market-rate development for the first time in many years, and it’s also causing some property owners to reposition their properties for that market, Vitalius said. One of 2014’s more notable transactions included a $4.2 million purchase of four multi-family properties.

Two- and three-unit sale numbers in Portland saw their first major jump since 2011, while the average price of three- and four-unit properties also increased, Vitalius said. He added that a higher-end rental market is expanding in the city, spurring new investment. In some cases, the higher rent is causing some tenants to become buyers, he said.

Rents in Portland increased between 8% and 12% for 2014, Vitalius said, with higher-end studios averaging around $1,500 and market rate studios around $800. He noted that rent for subsidizing housing isn’t that far behind market rates, causing subsidized tenants to struggle.

Vitalius’ forecasted that Portland will continue to see strong sales in 2015 if sellers are still around. He said buyer demand will continue to exceed supply for two- to four-unit properties, which is expected to modestly increase their prices. Rents are expected to increase by another 5%, he added, and new rental units will be picked up quickly.

Also for 2015, Vitalius said, the Westbrook market is expected to emerge as rental rates increase, while Saco/Biddeford’s continued growth will be fueled by new developments, like the 80-unit Lofts at Saco Falls project and the 96-unit Lincoln Mill project.

Southern Maine office

The greater Portland office market is expected to continue to improve, as overall vacancy rates continue to drop for the fourth consecutive year in 2014, driving lease rates, according to Nate Stevens, an associate broker at CBRE|The Boulos Co. Last year’s vacancy rate was 7.64%, down 2.4% from 2013, 2.5% from 2012 and 5.38% from 2011. The suburban market led that decrease while the downtown market’s vacancy rate was flat from 2013. The suburban market’s rate was notably lower than markets in Boston, Hartford and Providence.

Stevens said the number of office transactions has continued to increase since 2009, adding that 2014 saw also saw the first significant increase in asking rates within that period.

As for trends, Stevens said companies are beginning to embrace alternative workplace design practices, the concept of adjusting a company’s real estate footprint — though in most cases reducing it — to increase efficiencies, productivity and talent retention.

Stevens said he forecasts the vacancy rate to continue a steady decline through 2015, which is expected to be supported by a high number of office sales. He added that lease rates will continue to increase, though rates will largely vary between different submarkets. In addition, he said higher quality building are expected to have a better recovery.

Southern Maine retail

Mainstream retail is well into recovery and ready for expansion, Mark Malone, principal and broker at Malone Commercial Brokers, said.

He added that Internet sales aren’t pounding the brick-and-mortar retail world the way they might appear to be doing so on the surface. In fact, he said traditional retailers are getting back at Internet sellers by essentially becoming an Internet retailer, something known as “omni-channeling.”

That means consumers can click onto an item on the Internet, but collect it at a store, such as the Hannaford To Go program, where consumers can pre-order and then drive up to a part of the parking lot where the order will be brought out to them. “Instead of showrooming, it’s webrooming,” he said. “They’re blending the physical and digital worlds.”

He added that vacancy rates for retailers in greater Portland are way down at 3.6%, though in Falmouth they are high at 12.7%. He added that all towns in Maine seem to be seeing a decrease in vacancy rates except Brunswick and Falmouth. “They are the only two towns that instituted a ‘Big Box’ ban,” he said.

Outside Portland, the biggest story is smaller stores, like Goodwill and various dollar stores. Aroma Joe’s coffee, for example, set up six new locations in 2014 and plans eight new ones in 2015. It is located in New Hampshire and Maine.

Overall, however, he said, “new construction continues to be nonexistent.” There’s been only 68,000 square feet constructed per year since 2010.

In both the hotel and industrial space, as well as select hot retail spots, many of the deals are done by word of mouth rather than being heavily advertised, signs of a strong market.

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